Third party funding, where investors who have no other connection with litigation support legal claims in exchange for a financial return, is starting to take-off in the UK with a number of funds having been set-up to invest specifically in litigation.
This is according to a report into third party litigation funding commissioned by City law firm Fox Williams and undertaken by legal market research company Jures.
The Fox Williams report profiles the third party litigation funding market following the publication of Lord Justice Jackson’s Review of Civil Justice Costs earlier this year and his broad endorsement of this method of funding legal claims.
The report draws on interviews with the main players – funders both in the UK and abroad, insurers, leading litigators, academics and commentators – to identify the factors that will drive and shape the market.
“Third party litigation funding is the point at which the law meets the worlds of business and finance and this in-depth study of the litigation funding market finds the industry at tipping point,” says Tom Custance, head of dispute resolution at Fox Williams. “The legal profession is going through its own version of the kind of ‘Big Bang’ experienced by the City in the 1980s. The question remains where third party funding will take root in this newly liberalised legal service market – if, indeed, it will at all. This study seeks to identify the factors that will determine the future of a new legal services innovation which could extend access to justice to the business community.”
The report reveals a number of issues critical to the future development of third party funding, including:
• A growing profile within the legal and business community. The success or not of third-party litigation funding depends upon the degree to which it is embraced by the legal profession and businesses
• A growing profile within the financial community. For all the talk of litigation funding as an emerging asset class, investors have yet to be convinced that it is going to be a compelling alternative investment
• The Jackson three. It remains to be seen how a regime of voluntary self-regulation can deal with Lord Justice Jackson’s big three issues (capital adequacy; adverse costs; and termination)
• A different model. Much of the debate around third-party litigation funding relates to commercial claims. It is inevitable that the market will gravitate towards consumer claims and the model of third-party litigation (in particular when combined with alternative business structures under the Legal Services Act) could lead to a very different model of litigation funding.
The report indicates that there has been a marked increase in the number of funders following the Jackson report but this is tempered by a cautious response from the investment community to a new asset class and levels of funding activity remain low.
“The prospect of a vibrant third party litigation funding market has huge opportunities and some threats for the business community,” says Custance. “No one wants to see any increase in unmeritorious legal activity but that is unlikely to happen because funders will in practice only fund cases with a strong chance of success. However, the benefits of promoting access to justice for individual or corporate clients who can’t afford to pay legal fees or, indeed, those who would rather hedge the financial exposure of litigation by involving a funder are huge. There is a process of education both for business and indeed for the legal profession. We hope this report stimulates debate in this area and raises awareness of the potential benefits and drawbacks of a market in transition.”